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August 10, 2007

Running the Numbers: Why Newspapers Are Screwed

[From Silicon Alley Insider]:
It's easy to say that
the New York Times and other newspaper companies are screwed, but
sometimes it helps to actually run the numbers. Do you know why
they're screwed? It's actually not the cost of paper, ink, trucks,
printing plants, and other physical distribution expenses. Rather,
it's the cost of content creation.

Senior New York Times reporters believe they are underpaid, and,
relative to other highly educated folks at the peak of their
professions, they sure are. But relative to the online revenue they generate, those talented reporters, columnists, editors, and fact-checkers actually cost a fortune.

Newspaper content generates way more revenue in the physical world
than it does online, because offline it can be packaged with
classifieds and display ads and actually sold. In the online
world, meanwhile, it has to be given away, and because classified ads
are now run by classified sites and newspaper sites are only one of
dozens of places where people get news, the advertising opportunity is
comparatively tiny.

How tiny? Compete.com says the monthly reader base of NYTimes.com is about 7.5 million people.
Offline circulation, meanwhile, is about 1.1 million. If we assume
that the ratio of offline/online revenue at the
Times Company is similar to that for the publication itself, the 7.5
million online
readers generate 10% of the publication's revenue, and the 1.1 million
offline subs generate 90%. Offline circ and ad revenue are both
declining. So let's think about what might happen as these trends
continue.

Specifically, let's pretend that, tomorrow morning, every print
reader stops buying the paper, and, instead, reads it online. To be
safe, let's further assume that each offline "subscription" actually
encompasses two or three readers. In other words, let's pretend that,
tomorrow, print circulation goes to zero, and online readership jumps
by 2.5 million. What would happen to the business?

The company would eliminate paper, distribution, printing, and all other physical production costs.

Content creation costs would stay the same. (The site would have to pay the freight for all the content it now gets for free).

All print revenue--ads and circulation--would vaporize.

No, no, you say, the latter assumption is absurd. By the time print
papers disappear, that $55 billion-plus of annual newspaper advertising
will all have moved online, so the companies will be fine. Yes, the
advertising will have moved online. But, no, newspapers won't be
fine. Why not? Because only a small fraction of that $55 billion will
flow to newspaper sites as opposed to eBay, Monster, Yahoo, Google, et
al. We can quibble about the exact percentage, but just for kicks,
lets pretend that, if the paper were suddenly eliminated, 25% of NYT's
offline revenue would flow to NYTimes.com.

With these assumptions, we can make the following adjustments to the
NYT's Q2 numbers. (The calculations and assumptions are laid out in more detail on this page).

REVENUE:

Cut offline revenue to zero

Boost online revenue by 33% to account for increase in online readership

Boost online revenue by 25% of offline revenue under assumption that some will follow online.

COSTS:

Cut "raw materials" costs to zero.

Cut "other" production costs to zero, under assumption that they
are ALL print-production and distribution related (which they probably
aren't)

Reduce "wages and salaries" by 25%, under assumption that some are
print-production and distribution related (which is probably too big a
reduction)

Revenue drops by more than half, 40%-50% of employees get fired, and
the company still loses money. Using the NYT's Q2 numbers and these
assumptions, for example, revenue would have dropped from $789 million
to $285 million. More importantly, EBITDA (earnings before interest,
taxes, depreciation, and amortization) would have dropped from $118
million to -$64 million. Which means that management would just be
getting ready to fire a few hundred more people.

Comments

The same economic logic applies to broadcast TV. The networks now get 1-3 minutes an hour of advertising for every episode of LOST or 24 delivered by streaming or downloading from their websites. They are trading that for the 15 minutes of 30-sec spots they get on traditional broadcast TV shows. Why should viewers sit through 15 min. of commercial clutter at 9PM on Monday when they can watch 24 anytime with only 3 minutes of ads? They won't. TV networks are screwed....too. (And so are the affiliates, advertisers and actors who depend on BigTV)

I'm a little surprised that you didn't point out one of the more of important facts, which is that online ad campaigns are far more affordable and cost-efficient for advertisers than print ads. So even if ALL the individual advertisers moved from Acme News print to Acme News online, the revenue they would bring is substantially less.

Consider this. If a reporter writes 150 stories a year for a mid-sized daily, and each story averages 10,000 page-views, she'll generate just $15,000 a year in online ad revenue at a $10 C.P.M per-ad rate. Three ads per story push that to $45,000 a year, which is better. But you're probably still short of covering her wages and benefits, let alone all the other embedded costs that went into producing that story (editors, photographer, admin staff, IT, facilities, etc. etc.)

Henry,
Your theory is interesting but likely extreme given it's based on the assumption newspapers and offline revenue will disappear. I'd be interested in seeing your numbers based on a 50% reduction in circulation rather than 100%.

In terms of how much reporters are paid, one of the biggest problem within the new economic landscape is newspapers have too many reporters making too much money - even if it isn't as much as other professions. As a result, newspapers will need to have smaller staffs or have a small number of high paid reporters and a whole bunch of young, cheap whippersnappers.

Henry Blodget: I think newspapers are screwed, of course, but in the long run. Not for the next two decades, at least. And they will be killed by an iPod-like gagdget that replaces paper (very hard, really hard mission, indeed), not by the web as we see it (from PC+laptop+PDA+smartphone).

And the point is that, exactly: content is not cheap. So, people would pay for it when they don't have content.
You surely don't believe in all that citizen-journalism crap, do you? 98% or so of the "content" produced by bloggers and "citizen-journalists" in hype-farms like Digg are mere opinion replicas and copy-pasted facts of what newspapers have published.

Movement One: surrounded by tons of information, I WILL PAY some guys (journalists, they are called for now) who help me separate the garbish and replica from the clever and value-added news I need. I pay in cash or by giving my attention to ads (more on this later).

Movement Two: without that "guide content" from, hu, The Press, ordinary people (that is: not you an me, of course!) will discuss and post about -- yeah, you guessed, their cats.

I think press (and journalism) is not that doomed. It must make some adjustments. But we can all see some of the big guys doing it. Here in Europe we have some fine examples, from BBC to El País to Guardian, to name only a few.

I also think we will assist a phase of dissemination, with small media groups (like blogging networks right now) emerging in the field.

Michael Bazeley; newspaper companies are diversifing since XIX century. The news are just the creme on top of the cake.
You are suposing ad cost will remain cheap -- and that is not true. Mercedes will not buy ads in joe's indistinct blog at 3 cents a click: Ford will run ads in a network of solid projects with valued content, prestige and a established audience -- at 10 or 20 or even 30 dollars CPM.
Me, CEO of BMW, I will definitively NOT authorizing buying banners on Hi5, Orkut or similar low-level, over-crowded social networking sites. Maybe on Facebook... if they convince me. But I would agree to run an ad in Internet Outsider at -- say -- 10 bucks CPM, and will try to buy banners in The New York Times even if the cost 4 times more.

The ecology and economy of this bussiness is changing fast. Google is valorizing AdSense (at least, as far as my experience in my editorial network tells me). At this point all ads are equal, like cats in the night -- but the day will show different value of content.

In an article about the politics and economics of consumer choice in cable entertainment ("Bland Menu if Cable Goes à la Carte") in the New York Times, the author talks about how it's actually a good thing that the costs of producing niche programming are borne by all cable subscribers, as otherwise such programming would be very expensive and possibly not attract enough buyers to exist at all (even the most popular channel, ESPN, would rise from $3/month to $12/month). This makes sense, and could be a useful way of thinking about two other media businesses that are in some trouble: the Web and newspapers, both of which are in that bad à la Carte downward spiral.

In the case of the Web, despite the large amount of investment and growth in Web users, the economics still do not support niche content in any serious way. Small publishers have not made a living off of their content, depending on VCs or large distribution networks for investment to stay afloat, or publishing despite the lack of money. And even the most popular blogs on the Internet make a tiny amount of money compared to any other publishing medium like books, magazines, TV, etc. For example, Boing Boing is estimated to bring in $50,000/month in advertising revenue, which sounds like a lot until you consider that a single full-page ad in a local magazine like New York generates the same amount of revenue. Traditional media companies like AOL and Yahoo! have tried to aggregate many small publishers and sell ads across all of them, but despite getting a lot of traffic for this content, the rates for ads remain low (and at flat growth rates). The money remains in search text ads. Jaron Lanier pointed out in an Op-ed that this model doesn't work for content authors.

In the case of newspapers, their audience is falling steadily and won't sustain the costs of keeping the staffs of reporters and editors working (let alone the costs of publishing in print). They have had some success working with internet networks like Yahoo!, but this is likely not sustainable nor will it replace enough revenue to keep things going at current spending levels (magazines haven't had the same problem, but that's another topic).

So given that the cable model supports a number (not a huge number, but a number) of niche content players, and given that the Internet functions well as a big lab for new ideas but not for building content businesses, maybe what's needed is a sort of content consortium, or at least association of creators, with thresholds for membership and the ability to bargain collectively for better compensation. This would be different from a union, more like the Author's Guild or Screen Actors Guild, where plenty of work is done outside their auspices, but productions that generate a lot of revenue must conform to standards of pay. The cable model shows that if companies seeking to exploit content have to buy in to a collective pool of content, content costs are lower while allowing even niche content to thrive. This model doesn't need the cable networks to work for the author's benefit.

In a rough environment for content creators, where the economics are against them (but no one wants them to stop creating), the authors and makers should hang together more than they are. Some kind of association would re-balance a business that is out of kilter, draining the money out of a very valuable part of the culture we live in.